The Broken Trendline Retest Forex Trading Strategy is a price action trading system based on the behavior of price to come back to the trendline that has been broken (intersected), hit it and bounce off it and take off in the direction it was going in the first place.
Currency Pairs: Any
Timeframes: Anything above 1 hr is recommended but you can also use smaller timeframes.
Indicators: none required.
WHY DOES PRICE BREAK A TRENDLINE AND COMES BACK TO IT TO BOUNCE OFF IT?
My simple answer: I don’t know. It is just market behavior of supply and demand, buyers and sellers at work that somehow happens to cause price to come back to the trendline and make it bounce back up or down depending or what direction it was going initially.
The chart below show the AUDUSD currency pair in the 4hr timeframe and you can see those two trendlines drawn:
- the first trendline is a falling trendline indicating that the market was in a downtrend until that trendline was broken. From there price moved up but later it came back down to touch that trendline that was broken and then bounced up from there.
- The second trendline is a rising trendline indicating that the market was in an uptrend until that trendline was broken. From there, price moves down but later, made its way up to touch that trendline it intersected previously and then bounced down from there.
So knowing this price action behavior, it is very easy to form a trading system around it.
- draw a falling (downward) trendline
- when price breaks that trendline, you wait for the retest. A retest is when price moves away (up) from the trendline and then eventually comes back to it.
- When it comes back to it, wait for a candlestick to actually touch that trendline.
- Place a buy stop order 2 pips above the high of the candlestick that touches that trendline after the candlestick closes. If that buy stop pending order is not activated, then continue to move that pending order down on each high that is lower than the previous candlestick’s high until the buy stop pending order is activated.
- Place your stop loss 2-5 pips under the low of the candlestick that activates your pending order or you can also use the nearest swing low.
- For take profit target, use the previous swing high point or otherwise, aim for a 1:2 or more risk to reward.
- draw a rising (upward) trendline
- when price breaks that trendline, you wait for the retest. A retest is when price moves away (down) from the rising trendline and then eventually comes back to it.
- When it comes back to it, wait for a candlestick to actually touch that trendline it broke previously.
- Place a sell stop order 2 pips below the low of the candlestick that touches the trendline after that candlestick closes. If that sell stop pending order is not activated, then continue to move that pending order up on each low that is high than the previous candlestick’s low until the sell stop pending order is activated.
- Place your stop loss 2-5 pips above the high of the candlestick that activates your sell stop pending order or you can also use the nearest swing high and place it 2-5 pips above it as well.
- For take profit target, use the previous swing low point or otherwise, aim for a 1:2 or more risk to reward.
Disadvantages of The Trendline Retest Price Action Trading System
As usual, all forex trading strategies have their bad points and for trendline retest trading strategy, they are:
- sometimes price will not bounce back off from the trendline as anticipated, which means it will cross it and continue to go up or down
- there will be times when price will not touch the broken trendline and head back down or up.
- there will be times when price will cross above/below the broken trendline for a significant number of pips which will make you think that the setup is invalid only to turn around and obey that broken trendline. In such times, if your stop loss is tight, you may get stopped out.
Advantages of The Trendline Retest Price Action Trading System
- this is one of the best strategies that have the best risk:reward as well.
- trade entries are based on price levels/zones where there’s less chance of your stop loss getting hit.
- very simple system but a powerful system to sell the temporary rally in a downtrend and buy the dips in an uptrend